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I doubt that simply wall st’s algorithms will be able to cope with the complexity of a business like LGEN or the reporting vagaries of the new accounting standards.
Will it be able to differentiate between the various types of liabilities and their timescale? There is a huge difference between deferred profits, trade creditors and annuities due to be paid in the future.
It also doesn’t instil confidence when it says that the company revenue is less than $1m and that the company is loss making.
So, in short, I wouldn’t place too much reliance on its dashboard.
So, it looks like the 4 main points that I don’t recall being raised on this board recently are:
1) lgen liabilities are a massive multiple of equity. A 3% understatement of liabs would wipe the company out.
2) the fall in aum will push the company into a loss.
3) the die/esg agenda appears to have overtaken the desire to make money.
4) the Lti product could end up being financial dynamite and doing to lgen what subprime did to hbos.
Have I missed any?
There is quite a lot to unpick in that but I think that initially the following points should be noted.
1) under the new IFRS rules the co has to include the assets and liabilities of all the funds it manages so this might look rather worse than it is.
2) the asset management division is only one part of the business and the others are doing well.
3) I tend to assume that this is mostly virtue signalling
4) lti was tested pretty convincingly a year ago and impacted some of their clients (reducing aum) but not resulting in losses for lgen.
I am sure that others, better qualified than me will be able to comment in more detail.
Care to expand on that? Are there any in particular that you think deserve further research?
What a shame. I was hoping to buy more…
Alank1
Good question. Fwiw here is my view.
Let’s split it in two.
A) how reliable is the dividend?
Given that the board have recently announced that they expect to increase it by 5% next year we can assume that they are pretty confident about it. This confidence is underpinned, I suspect, by the following factors:
1) the current dividend cover is nearly 2
2) the solvency ratio is strong at 230%
3) they are sitting on £13bn of deferred profits in the balance sheet. This is slightly more than the market cap currently.
So, as these things go the dividend looks pretty solid.
B) the ability to increase it year on year?
This is less certain. They have for several years been following a policy of increasing dividends by circa 5% and they have given guidance that will continue next year. Given the size of the deferred profit in the balance sheet I reckon they will be able to continue increasing the dividend each year but am not sure that they will be able to keep it as high as 5% pa. With compounding that gets to quite a large number over time. However, I could see it rising by a smaller percentage annually (say 1p pa?).
They have said that they are writing a lot of new business at very attractive rates so here is hoping that they will be growing their profits too.
DYOR etc etc
Karl,
Do you have any idea of the complications involved in converting pubs to housing? Many are beloved locals and character properties that will have staunch defenders. It might not be quite as easy as you imply….
Tambo, 275p sounds more realistic to me too. Would mean the yield falling to 7.5% which would be closer to the 10 yr mean of 6.6%.
In the meantime, I just keep adding….
Robina,
Of course it does. Sod’s Law as Gerry put it.
I’ll be happy if the SP hovers in this territory for a while and I’ll top up as funds allow. I am buying for the long term to hold for the dividend income in my retirement. Largely, as I know I am crap at profit taking for income. Plus one never knows where the profits will come from. Whereas a strong and relatively reliable dividend stream will give me peace of mind and allow me to leave the rest of my portfolio to hopefully grow.
Can you show me another FTSE 100 that has more than its market cap in deferred profit supported by the solvency ratio and dividend cover of LGEN?
Or even one that comes close?
Genuinely interested.
GLA
Robina,
I’d be mighty surprised at a divi cut. Especially in the light of recent guidance and the fact that they are sitting on £13b of deferred profit and cash generation remains strong.
I suspect that the share price owes more to macro and market wide issues than anything company specific.
I’ll keep adding on the dips …
How far do the charts indicate it might go?
And at a prospective yield of 9.6% with the next 5 years of profits already booked and sitting in the deferred profit account on balance sheet.
I agree that would be nice. Tho I suspect the BOD would have a lot of encouragement from shareholders to accept a discount to NAV and so a price below £1.
In the meantime I expect the share price to continue to languish at a 60%+ discount to NAV until they start to make real inroads to their debt mountain.
The next update needs to show progress to their back to a billion plan, margin maintenance (if not improvement) and a speeded up debt repayment plan.
There are people on this board who know much more about the terms of the debt pile than I do but I hope that the current bout of inflation will also be lending a hand in reducing the real value of the debt.
I remain hopeful that the shares will be rerated upwards over the course of the next 5 years and although I am currently underwater I am sufficiently patient to wait.
Fwiw I’d describe myself as cautiously optimistic.
GLA
Toltorisk, thx. Fortunately I took fright quite early on and only lost a small %. Equitable Life had been the pension provider of choice for most professionals for many years because it didn’t spread results between years and was more transparent about its performance than most of its peers. All was good until some twat in marketing came up with the bright idea about guaranteeing results whilst forgetting that interests rise and fall over the decades.
I learnt a good lesson and have managed my own affairs in a Sipp ever since.
I completely agree with your comments re LGEN. I look at the low SP as a buying opportunity as I intend to hold for the dividend for the foreseeable. I am confident that at this price I will get my investment back in dividends over the next decade and still have the shares. I am sure that the SP in due course will reflect the 10 year average yield of 6.6%.
Indeed.
Though what I meant was that I still think that many sectors are still toppy and so am accumulating cash to use if there is another crash.
In the meantime I am happy to hold LGEN and collect the dividends at a prospective yield of 9.6%.
And hardly once in a lifetime. Sadly, I remember the buying opportunities after black Wednesday, various points in the nineties and post millennium dot com crash. Not to mention 2009 when for much of the year the ftse had sunk to 3600. You didn’t need to be a world class stock picker to do well then.
I was fortunate enough to have extracted what was left of my pension with equitable life still sitting in cash as I couldn’t make up my mind what to do with it. Over a 6 month period I spent it all on bombed out blue chips and some funds. I still hold AZN (up 280%) and ULVR (up 86%) ignoring dividends.
Whilst I am a huge fan of LGEN and think the current price is a great opportunity I am less sure about other sectors currently.
reminds me of the story about a state banquet at buckingham palace to honour gen de gaulle on his retirement as president of france. mme de gaulle was sitting next to prince philip who asked her what she most looking forward to in retirement. to which she replied in heavily accented english “a *****!”.
her husband broke off his conversation with the queen to interject “she means happiness!”
i bet her majesty had a good laugh later.
All he has to do is wait. The sp fluctuates with general market sentiment and interest rate expectations and at some point the price will be back above £3. Probably briefly before resuming the rollercoaster.
Fwiw the current prospective yield is 9.6% on 215p. The average prospective yield for the last decade has been 6.6%.
We expect the dividends paid in 2024 to be 20.64p and at 6.6% that would give a share price of 312p.
As we also expect the divi to continue to rise by approx 1p pa the share price at the average yield should rise over time.
As 6.6% is an average we can expect it at times to be higher and lower. So, it is all in the timing and he can sell next time the yield is low and the sp is high.
Plus it depends upon your entry price.
Had you bought once at 290p I can understand that you would be pretty disappointed at the 215p closing price today. But, you can’t undo what you have done.
The question is whether it is worth buying tomorrow in the region of 215p.
For all the reasons I outlined earlier I was happy to add another 5k at close today and bring my average down a bit further to 235p. I am still under water (inc div) but not by much and I am happy that the dividend stream will reward my patience over the coming decades.
But it is part of a wider (if not terribly balanced) portfolio.
Totalrisk, apologies, having reread what I posted earlier I fear it might have sounded patronising and that was not my intention.
However, for my own sake at least I thought I’d summarise my reasons for continuing to build my holding in LGEN. I have been buying steadily for a few years because I wanted to balance the hope factor elsewhere in my portfolio with a some cash generation prior to retirement. My funds portfolio have seen little or no growth in the last two years and I think that overall at the moment the risks are on the downside for the general market.
I have always been under the impression that well managed money should double every 10 years. Some investments will do better than that and others much worse, but on average that is respectable.
At the moment the LGEN dividend forecast for next year (20.64p) represents a 9.6% return on the current share price. The policy of growing the dividend by 5% a year for the next couple of years has been restated and is backed up by the £13.8bn deferred profits currently sitting in their balance sheet. Those are profits that have been booked on current contracts that for accounting rules need to be recognised in future periods. That is effectively the next 5 years profits which gives me a lot of confidence that the dividends will be paid. It is also more than the current market cap of £12.8bn by a whole bn. Normally, I would worry that a high divi might be unsustainable or that the market knows something important that I have overlooked but in this instance i think the sp has been driven by macro and wider market issues and trends rather than anything company specific. The profits are being driven by the bulk annuity market and these are generally once in a lifetime decisions, and not dependent on consumer whim or fashion. They report that they are writing a lot of new business at attractive margins that should ensure that the profits will be there to be paid out over the coming decades.
If the dividend grows at 5% a year for the next 5 years each share will throw off a total of 114p over that time. Assuming that it doesn’t grow at all over the following 5 years it will have generated 228p, which is more than double the current sp.
The average yield over the past decade is, if I recall correctly, circa 6.5% and at some point the market Will wake up to the value of these shares and the the yield will revert to the mean. On this basis the current sp should be over 300p.
However, I regard that as being a bit academic as I am buying to hold. The sp has a history of fluctuating and I regard the dips as buying opportunities.
The risk is that mortality rates begin to rise and that the annuities need to be paid out for longer. But any chance of a cure for cancer (hurrah) is likely to be offset by the declining efficacy of antibiotics (boo). But I am sure that the clever actuaries have factored all that into their pricing models.
GLA
Totalrisk, I can barely bring myself to think about conviviality at all let alone compare with lgen. I lost a couple of K on that basket case and it still rankles.
They were a tiny company that operated on wafer thin margins with a fruitcake of an md. Forgive the unparliamentary language but I knew the business well.
LGEN is a business on a completely different scale with a very different risk profile. It is a bit like comparing M&S with my local corner shop.
It is worth reading through the comments on this board and to read the half year reports to get a better understanding.